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Capital Account Convertibility Inescapable, Says RBI

Tuesday, May 19, 2015
By A Business Reporter

Pitching for full capital account convertibility, the Reserve Bank has said that with Indian economy becoming global it would be hard to maintain capital controls for a long period of time. "...Greater opening of capital account is inescapable as the Indian economy grows further and becomes global in dimension," RBI Executive Director G Padmanabhan had said at a recent lecture in Mangalore.

At present, the Indian currency is convertible only on current account, though some capital account transactions are also permitted. Full capital account convertibility means no restrictions on cross border movement of currency, reports PTI. Sooner than later, Padmanabhan said, India will need to get closely integrated with the rest of the world.

"So, India needs to continue moving towards full capital account convertibility. There is simply no escape from it. It is a moot question as to how fast the movement should be... That will depend on how fast we can meet the most important preconditions like fiscal consolidation, inflation control, low level of NPAs, low and sustainable current account deficit, strengthening of financial markets, prudential supervision of financial institutions, etc. India has already made visible progress on these fronts," he said.

RBI Governor Raghuram Rajan had last month said that the central bank aims to move towards capital account convertibility as also set up a system where loans could be bench-marked against market rate, alike London Interbank Offered Rate (Libor).

Following the June 1991 liberalisation, the government and the RBI have been progressively lifting curbs on capital flows, which saw the FII investment into domestic debt rise to USD 31 billion as of now.

Padmanabhan said: "A truly globalised economy, which the Indian economy is likely to become in the not too distant a future, cannot afford to remain isolated for a very long period of time." There are of course risks, but it need to accept these risks and move forward boldly while controlling the risks as far as practicable, he said.

Sound policies, robust regulatory framework promoting a strong and efficient financial sector, and effective systems and procedures for controlling capital flows greatly enhance the chances of ensuring that such flows foster sustainable growth and do not lead to disruption and crisis, he said, adding "India has all these in place and we need to keep on strengthening them."

"While there are risks associated with full capital account convertibility, resisting liberalisation over an extended period may prove futile and counterproductive. As the economy gets more globalised, it will become harder to maintain closed capital accounts," he said.

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